Sunday, September 25, 2005

Raging Bull

Khalid gives a pretty good rundown of the systemic risks that make the bull market in the GCC so very worrying.

My opinion - there's too much cash chasing too few investment opportunities in the region; too little oversight, regulation or transparency; too much exuberance - bear in mind, as Japanese bank Nomura pointed out, that Saudi Telecom's market capitalisation of US$74bn is worth more than BT (US$35bn), AT&T
(US$15bn), SK Telecom (US$15bn), and Telekom SA (US$9bn) combined - and far too many unsophisticated investors who think that having the names of a couple of ruling family members in the IPO prospectus is a valid alternative to a business plan - or, for that matter, an existing business.

Anyway. here are his conclusions:

Market valuations are now extremely inflated across the AGCC, raising the risks of panic sell offs and protracted corrections. The high degree of retail participation on the bourses, the role of excessive bank leverage, the absence of viable bond markets that could act as shock absorbers or an alternative liquid asset class or hot money on the exchanges, no real hedging instruments like index derivatives or market makers mandated to use their capital to stabilise falling shares on the regional stock exchanges are all a potent combination of systemic risk if sentiment changes.

...

Unfortunately, leverage cuts both ways. Leveraged bear markets can wreck havoc because buyers literally disappear since every market correction causes a new wave of distress selling from long only investors trapped by margin calls.

This is the daisy chain of capital markets panic that has triggered recession, banking crises and even credit crunches more than once elsewhere in the Middle East. After all, in Kuwait's Souk Al Manakh and Oman, the AGCC witnessed the leveraged daisy chain dominoes in the capital markets collapse and take down entire banking systems in a pyramid of paper speculation.

Let us hope that central bankers and securities regulators in the AGCC remember Santayana's warning that those who refuse to heed the lessons of history are doomed to repeat them.